The outcome of this weekend’s Greek elections was a positive surprise, but some may argue that RBI’s decision to keep rates on hold was a negative surprise. We disagree. This was the right decision, and it will serve to strengthen RBI’s credibility.

A rate cut would have had a minor impact on lending rates, given the reluctance of banks to pass a cut on to borrowers.

You could then make the case that a rate cut would not do any harm, one way or another. That’s not true. Credibility matters.

Importantly, a rate cut would have done little to support growth, even if banks had passed the cut fully on to lending rates. The key reason for this is that the slowdown in growth, to a large extent, is a supply-side story.

The lack of structural reforms has gradually lowered the potential rate of growth as supply-side bottlenecks have become more prevalent.

Consequently, stimulating demand through a rate cut would run the risk of teasing up inflation while doing little to spur growth. Cutting rates at this juncture would also pose risks, given other sources of inflation pressures, including from the weak exchange rate and needed upward adjustments to diesel and kerosene prices.

The twin deficits are another reason why it made sense for the RBI to stay pat.

While it is true that the government delivered a tighter fiscal budget, it may not be able to tighten the fiscal reins as much as planned. In addition, the wide trade deficit calls for tight macroeconomic policy settings to contain the import bill and external financing needs.

To cure the economy of what primarily ails its growth, it needs a heavy dose of structural reform, and soon. This would increase the potential growth rate over the medium term by resurrecting the supply side.

It would also help improve sentiments in the short term, in turn supporting the investment cycle. However, for this to take place policy paralysis would have to turn into policy vigor, which would not appear to be in the cards in the short term.

Decision gives credibility boost: Leif Eskesen

The outcome of this weekend’s Greek elections was a positive surprise, but some may argue that RBI’s decision to keep rates on hold was a negative surprise. We disagree. This was the right decision, and it will serve to strengthen RBI’s credibility.

The outcome of this weekend’s Greek elections was a positive surprise, but some may argue that RBI’s decision to keep rates on hold was a negative surprise. We disagree. This was the right decision, and it will serve to strengthen RBI’s credibility.

A rate cut would have had a minor impact on lending rates, given the reluctance of banks to pass a cut on to borrowers.

You could then make the case that a rate cut would not do any harm, one way or another. That’s not true. Credibility matters.

Importantly, a rate cut would have done little to support growth, even if banks had passed the cut fully on to lending rates. The key reason for this is that the slowdown in growth, to a large extent, is a supply-side story.

The lack of structural reforms has gradually lowered the potential rate of growth as supply-side bottlenecks have become more prevalent.

Consequently, stimulating demand through a rate cut would run the risk of teasing up inflation while doing little to spur growth. Cutting rates at this juncture would also pose risks, given other sources of inflation pressures, including from the weak exchange rate and needed upward adjustments to diesel and kerosene prices.

The twin deficits are another reason why it made sense for the RBI to stay pat.

While it is true that the government delivered a tighter fiscal budget, it may not be able to tighten the fiscal reins as much as planned. In addition, the wide trade deficit calls for tight macroeconomic policy settings to contain the import bill and external financing needs.

To cure the economy of what primarily ails its growth, it needs a heavy dose of structural reform, and soon. This would increase the potential growth rate over the medium term by resurrecting the supply side.

It would also help improve sentiments in the short term, in turn supporting the investment cycle. However, for this to take place policy paralysis would have to turn into policy vigor, which would not appear to be in the cards in the short term.